Picture a fairytale city rising out of the dust of some far-off land. First, the houses and buildings, hundreds and thousands of them. Then the bridges. Then the subway tunnels, beneath all this, while girding for skyscrapers sticks out from the earth like the ribs of some great dragon. Then, last of all, the cheque arrives, and it’s a biggy. This is Wuhan, China, population ten million and counting. By RICHARD POPLAK.
Wuhan is China’s ninth largest city. At least, it is as of today. It is a frenzied place, built on a chimera of financial finagling that threatens to undermine the entire Chinese model, largely because it is more disease than it is a symptom. See, Wuhan, like most rapidly growing Chinese cities, is what your old man used to call a pyramid scheme. Your financial advisor would call it a fixed asset investment and urge you to consider property in Wuhan’s upper west side. Unless he works for Credit Suisse, in which case he’d point out that Wuhan has enough residences to last eight years at the current rate of growth.
That said, at first glance Wuhan is sexier than a Bachman, Palin, Santorum ménage trois. If you don’t belong to the Tea Party, a closer look reveals that it is exactly as sexy as that. Consider its vaunted subway system. If the Gautrain has cost Johannesburg taxpayers roughly $3.2 billion to date, Wuhan is dropping more than $35 billion to shuttle its citizens perilously close to the devil’s doorstep along several tunnels almost 50m deep. This year alone, the city plans to spend $22 billion on roughly 5,700 construction projects, which, according to a recent article in The New York Times, is about three times the cash the city is bringing in from ratepayers.
Photo: Candidates enter a university to take part in the entrance exam for postgraduate studies in Wuhan, Hubei Province January 9, 2010. China's national postgraduate examination started on Saturday, attracting 1.4 million registered applicants in total, a record number since 2001 and a 13 percent increase from 2009, reported Xinhua News Agency. REUTERS/Stringer
If that sounds insane to you, congratulations! You now qualify as an MSNBC financial guru, and all your suited pals will call you “bearish”. But Chinese officials, including Wuhan’s Communist Party secretary, and ex-“Mr. Digging” mayor Ruan Chengfa, don’t have much of a choice. “If we want Wuhan to have leapfrog development and enhance people’s happiness, then we must build subways and bridges,” says he. What he really means is that his job security and bonus pay are based on year-on-year growth as mandated by Beijing. So Wuhan must grow. As it shall.
What underpins this steroidal metastasising, you ask? Land, for one thing. And buying debt with debt, for another. Unlike American cities, Chinese municipalities are not allowed to sell bonds to raise capital so they have to rely on other means to stock the larder. One of those is to, um, “encourage” land price surges, which in turn girds all the infrastructure spending. Build more, the price of land increases, which funds more building and so on. All well and good until demand collapses, and the price of land and property flatlines, or worse, drops off altogether. That is the definition of a crash.
Photo: Technicians maintain solar panels on a roof at a solar power plant in Wuhan, Hubei province, January 12, 2010. The Chinese government aims to boost renewable energy generating capacity in the country, with plans to produce at least 10,000 MW of solar energy and 20,000 MW of wind power by 2020. Picture taken January 12, 2010. REUTERS/China Daily.
Wuhan has sold an astonishing $25 billion in land over the last five years and is still struggling to pay off debt. Its major investment company, Wuhan UCID, is tasked with gathering the lion’s share of the money it takes to keep the city heading heavenwards. One of its tricks is an oldie but a goodie: In 2009, they borrowed $230 million from investors, and took a third of that to pay off creditors. That, folks, is how business works, right before it doesn’t work anymore. And while capitalism itself is one big shell game, the problem with China is, if it fails, given the fact that it’s propping up the rest of the world economy, we go down with it.
This is especially true of African nations. African growth, the very GDP uptick that has made The Economist, Newsweek and other Africa-bashing publications review their “basket-case” lyric sheet, is coupled so utterly to Chinese growth that if you were to plot the two on a graph, they’d mimic each other completely (even if African growth is on a significantly smaller scale).
Photo: Worshippers burn incense at the Guiyuan Buddhist Temple in Wuhan, Hubei province, on the first day of the Chinese New Year February 14, 2010. REUTERS/China Daily
The American municipal model has displayed its weaknesses and then some, given how many cities have gone belly-up since the crash. But America’s big towns have endured crisis after crisis, and even those that have failed spectacularly, like Detroit, are enjoying a strange resurgence of late. Detroit is, of course, a special case, subject as it was to some of the worst racial violence in American history, along with the flight of manufacturing. Throw Newark, Buffalo and exurban Florida into the mix, and one gets a sense of what Wuhan may have to look forward to. Except on a much, much bigger scale. The entire state of New Jersey doesn’t match the population of Wuhan.
So, what’s a Chinese party hack to do? The kind of mega-building endemic in Wuhan, also known as fixed asset investment, has powered the Chinese economy since the eighties. (And you thought it was exports? Shame.) It was especially necessary during the crash, when Beijing power sprayed even more renminbis into infrastructure. Now, Beijing is trying to manage growth to keep inflation under control. It’s not an easy balance because, without growth, Wuhan’s entire model deflates. What’s the Chinese for “ghost town?”
China is nowhere near a meltdown. But the CCP is properly concerned about cities like Wuhan and their rampant borrowing. They know their model is a sham, but there’s not much they can do about it until the entire system comes up for a review. In the meantime, Wuhan will continue to go up. And up. And under. And up again. DM
- “Building Boom in China stirs fears of debt overload” in The New York Times;
- Wuhan’s official website.
Main photo: Buildings are seen amid heavy fog in Wuhan, Hubei province December 3, 2009. REUTERS/Stringer